Synfuel Boondoggle

Back during World War II, the Allies were successful in largely cutting off Germany’s oil supply. To maintain their war effort, the Germans figured out how to make synthetic oil from coal. Later, the South Africans perfected the German technology in order to cope with international sanctions.

Consequently, making oil from coal is not some pie-in-the-sky dream, but something scientists and engineers have known how to do for quite a long time. The hang-up has always been cost — no one has ever figured out how to make synthetic oil for a price that is competitive with the conventional stuff.

Cost didn’t bother the Germans and South Africans — for them, energy independence was something imposed upon them by their enemies. They didn’t have the luxury of choosing among alternatives. Synfuel was it.

In the 1970s, American politicians latched onto synthetic fuels as a way of coping with Arab oil embargos. In the waning days of the Ford administration, Vice President Nelson Rockefeller proposed a $100 billion energy independence corporation that would subsidize synthetic fuel development in order to make it commercial. A similar effort today would cost close to $400 billion.

Although the legislation had strong bipartisan support and passed the Senate by a vote of 80 to 10, it ran into opposition in the House, where a combination of left-wing Democrats and right-wing Republicans ganged up on it. The lefties were mostly concerned about the environmental consequences of synfuels, while the right-wingers were against government subsidies.

The unholy alliance of left-wingers and right-wingers managed to stop the synfuel bill temporarily in 1975. But whenever there is the prospect of multibillion dollar subsidies on the table, it takes more than one bullet to kill the beast. The following year, synfuel supporters were back with a scaled-down program. They thought that if they could just get a few demonstration projects going, then they could gradually expand the program.

Once again, the principal opposition was in the House. Although support for the new synfuel effort was much stronger, opponents also picked up some key allies. The most important was the U.S. General Accounting Office, which threw cold water on just about every argument offered by the pro-synfuel crowd. In a tense vote on Sept. 23, 1976, the synfuel bill was defeated by a single vote.

Having beaten the synfuel bandwagon two years in a row, opponents thought they had put the monster away for good. I was not so sure, and I held onto all the files I had accumulated on the legislation. This paid off in 1979, when another Arab oil embargo and long gas lines reignited interest in energy independence. A new effort was launched to subsidize synthetic fuels and build a strategic petroleum reserve, with a cost of well over $100 billion.

Fighting this effort was harder because gas lines made people think there was a large absolute shortage of oil. In fact, the falloff in supply was not very great. The gas lines resulted entirely from stupid Carter administration policies. In particular, it imposed price controls, so that prices couldn’t rise to market-clearing levels, and allocation controls that made gas plentiful in some places and virtually non-existent in others. Basically, the Carter people did just about everything wrong that was possible to do wrong.

Unfortunately, few people recognized that U.S. policies were almost entirely at fault, and they focused their ire on the Organization of the Petroleum Exporting Countries (OPEC). What better way to punish oil producers than by eliminating the need to import from them by making our own oil out of plentiful coal and oil shale, most people thought.

In the end, the need to appear to be doing "something" got Congress to establish the Strategic Petroleum Reserve and the U.S. Synthetic Fuels Corp. Tax credits and other subsidies were enacted to make synfuels competitive.

The program never really got off the ground, however, because one of the first things Ronald Reagan did after taking over the from the hapless Jimmy Carter in 1981 was to completely decontrol the prices of oil and gasoline. Once prices were free to clear, producers invested in new supply and consumers reduced demand by investing in more fuel-efficient autos.

Prices spiked at first, but after a few years they fell to pre-embargo levels. Since synfuels were barely competitive, even with massive subsidies, when oil was at $30 per barrel, they were obviously uneconomical at $10 per barrel.

Today, the price of oil is well above $60 per barrel — far higher than the price that synfuel producers have always said they needed to be competitive. Yet they are back again demanding subsidies before they will undertake the effort. One can only conclude that the price of oil will never reach a price at which synfuels can be produced without government subsidies.